Looks like an insurance endorsement deal gone sour. Too bad.
The story is at Forbes.
Monthly Archives: May 2009
Can We Inflate Our Way Out of This Mess?
Hi All,
Sometimes you read a news story and it hits you in the face like a brick.
Evidently Harvard economists Greg Mankiw and Kenneth Rogoff are advocating that the US central bank adopt a target inflation rate of 6%. Their rationale is that the US has taken on a huge amount of debt and they argue inflation will facilitate deleveraging by reducing the real value of debt and stimulate spending by removing peoples incentive to save.
Some excerpts from their Bloomberg article:
““I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
Such a strategy would be risky. An outlook for higher prices could spook foreign investors and send the dollar careening lower. The challenge would be to prevent inflation from returning to the above-10-percent levels that prevailed in the 1970s and took almost a decade and a recession to cure.
“Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” says Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond. “The Fed would have to create a recession to get its credibility back,” adds Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.” (Bloomberg).
This policy may seem like a good idea, but please don’t underestimate the impact inflation will have on your bottom line.
1) Your savings will lose value. Lets assume you’ve got $1,000 squirreled away. If inflation runs at 6% for only two years, then your thousand would only buy about $883.00. That’s $116 bucks, up in smoke. This makes the processes of savings and investment a great deal harder. This is important because saving is a first step to building any sort of real wealth.
2) Generally speaking if you have anything that generates a fixed income, you’ll lose out. For example, if you have a CD – the best current rates are a little over 2.5% – you’d effectively be losing 3.5% on your CD if inflation is at 6%. You’d get a similar situation if you held bonds or fixed payment annuities.
3) Cost of living adjustments lag behind inflation. In periods of high inflation your salary, pension or government benefits may get an adjustment to account for the reduced power of the dollar. However, the effects of inflation are immediate and usually adjustments lag behind this. So, you’d be stuck with higher prices.
So, the reason why these sorts of editorials are so maddening is that while inflation might have some beneficial effects for the economy, Joe and Jane average will get the monetary equivalent of a sharp stick in the eye. If inflation does increase it will require much frugal living regardless of your income, as well as an ability to increase your wealth at a faster pace.
If you want more from these guys, check out Greg Manikow’s blog or Ken Rogoff’s faculty profile.
Best,
James
Update1: If you want to profit from inflation, the Digerati Life has a good posting on 12 moves you can make to cope with rising interest rates (DL).
Aristotle on Usury
.jpg)
Being a university student, I sometimes get to revisit the works of classical philosophers. Well today I came across a wonderful gem by Aristotle – one of the great greek thinkers. If high interest credit cards were around in ancient Greece, Aristotle probably would have taken a dim view of them:
There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural.
– Politics, Book X.
Preventing Family Conflict Over Inheritance
Sometimes when a parent passes away, his children fight over the assets the parent has left behind. For example, I have some personal experience with this. My grandparents lived in
My aunt, who lived across town from my grandparents, took responsibility for caring for then during their dying process. She paid their bills, managed their care givers, visited them and made sure their house was in good repair. When they finally passed on, my aunt made much of the funeral arrangements as well.
Being that she lived in the same town as my grandparents, by default she was responsible for taking care of their assets, including the house. Unfortunately, my aunt was cheated by the contractor who was hired to renovate the house and get it ready to be sold and ultimately she had to sue the contractor.
The lawsuit ignited a number of long simmering disagreements between my aunt, my mother and my uncle. Unhappy with how things were being handled by my aunt, my mother and uncle drove to
Now, what are the implications of this for personal finance? Generally speaking finance related conflict between siblings surrounding the death of parents is about much more than the actual money itself. It likely involves a complicated set of psychological factors related to history of the family. However, regardless of the deeper reasons for fighting, two things are clear.
1) An independent executor of the will should be established. This should be someone who is NOT a member of the family. Ideally a trusted attorney should fulfill this role.
Why someone independent? Because, the experience of death and disposing of assets leaves many with judgment subject to the whims of emotion. Also an independent executor can act as a scapegoat in case something goes amiss. For example, my family’s case, an independent executor would have allowed my family to direct their disagreement toward someone other than each other.
2) A will should be established before the death of the parent. This should spell out precisely what the parent’s wishes are prior to the parents death. The executor should merely execute the parent’s wishes as stated in the will. The worst thing that can happen after the passing of a loved one is a long, drawn-out fight over who gets what part of their wealth.
Not effectively planning to manage inheritance disbursement simply leaves too much potential for trouble.
Best,
James
Was Racism A Cause of the Economic Collapse?
According to the Applied Research Center – a social justice advocacy think tank, it was.
Heavy stuff – there may be some truth to it. So check it out for yourself here.
OECD: High Taxes Make People Happy
Hi All,
I saw this headline and immediately started talking about it with Miel. MarketWatch’ s Thomas Kostigan has a provocative editorial out. In it he claims that northern European countries are happier due to their very high tax rates. The main reason, Kostiagan asserts, is that the high level of taxation pays for social services which help to mitigate the risks of everyday life. From the article:
“Northern Europeans pay some of the highest taxes in the world. Danes pay about two-thirds of their income in taxes. Why be so happy about that? It all comes down to what you get in return.
The Encyclopedia of the Nations notes that Denmark was one of the first countries in the world to establish efficient social services with the introduction of relief for the sick, unemployed and aged.
It says social welfare programs include health insurance, health and hospital services, insurance for occupational injuries, unemployment insurance and employment exchange services. There’s also old age and disability pensions, rehabilitation and nursing homes, family welfare subsidies, general public welfare and payments for military accidents. Moreover, maternity benefits are payable up to 52 weeks.”
For my part, I think Kostigans thesis is rather silly. At least here in the Discrict of Colombia I’ve found that public services are often badly managed, slow and of limited impact in addressing real world issues. Another problem more generally with Kostigans idea is that society tends to be more robust in Scandavia, e.g. families are stronger and there are fewer endemic problems like crime and regionalism. It’s a lot harder to build up your wealth when you are paying in 70% of your income each year!
At any rate, its an interesting piece so check it out at marketwatch.
Best,
James
Good News: Small Investor Sentiment Improving
Hi All,
Well here is some good news. The NY times is reporting that so called “mom and pop” investors are getting back into the stock market. Many commentators have noted that recessions are partly psychological – that is fear of losses cause people to limit their economic participation, thus resulting in overall declines in capital investing. It’s hard to make wealth when approaching investing with fear. The fact that small investors are getting back into the market means that uncertainty is starting to decline.
Some excerpts from the article:
“A woman on Long Island opened an Ameritrade account and started buying stock in mining companies. In Chicago, a developer in advertising is betting heavily on oil. And outside Seattle, a Microsoft employee is snapping up shares of technology firms and retailers.
After being pummeled in Wall Street’s plunge last year, many small investors pulled out of stocks. But the stock market’s recent rally — one of the sharpest since World War II — is starting to beckon some of them back. So step by nervous step, some smaller investors are tiptoeing back in. They are pulling money out of savings accounts and money market funds and buying stocks and bonds, fingers crossed.“
Click here for the full text.
Best,
James
Save Your Money
Hi All,
Save your money.
That is all for today.
Thank You,
– James
Is China At Forefront of New Global System?
My wife Miel is a world traveler. She’s been all over, the Middle east, Asia, Africa and Europe. This has given me a sense of the importance of looking at economics from a global perspective.
Now, what I fear is happening is that because of America’s never ending budget deficits and titanic job losses, we are losing our economic preeminence. As we lose our economic preeminence, it makes everything from quality of life to ability to build wealth, much more dificult. Case in point, the latest article from The Economist:
Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that has capital controls and a managed currency. It has been assumed that China will have to move towards the Western model. But why not the other way round? Western countries adopted free capital markets, as the British adopted free trade in the 19th century, because it suited them. Will China now be able to call the shots? Uncomfortable as it might be for the West, the next monetary order is more likely to be made in Beijing than in New Hampshire
There might be some truth to this, click here for the article.